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Differentiating Between Payment Processor and Payment Gateway

One of the key aspects to understand in both traditional and e-commerce is the difference between the payment processor and the payment gateway. For merchants seeking to understand and capitalize on new methods of digital payment increasingly used by customers when shopping and paying for services online, understanding the chain between customer, business, and bank is imperative.

To begin, it is prudent to sketch out the simple chain of exchange between merchant and customer to best understand how payment processors and payment gateways become included in the link. In a traditional exchange, a customer purchases a good or service from a merchant and pays cash for such good or service. There is a direct exchange between the customer and merchant, the payment need not be “processed” because the payment is in hard currency.

The exchange between a customer and a merchant becomes more complicated when the exchange of goods and services involves credit cards, debit cards, or other digital forms of payment. The exchange between merchant and customer also involves extra steps when the transaction occurs not in person, but online. This where the payment processor and the payment gateway become key. If a customer chooses to pay for goods or services with a credit or debit card, you must have a credit card reader to accept those electronic funds. The function of the payment processor, of payment processing company, lies here.

To transmit the payment from the customer’s credit/debit card (and the customer’s affiliated bank) to the merchant’s account in his or her affiliated bank, a business requires the services of a payment processing company. As a merchant you will need to contract with a payment processing company to process this electronic payment between you and the customer. The payment processing company essentially facilitates the transaction between a merchant and a customer, acting as a middle man.

The payment processor translates electronic credit/debit payment from a customer’s bank account to a merchant’s bank account. The payment processing company often provides merchants with the physical credit card reader needed to accept a customer’s credit card. In summation, the payment processor can be understood to be the translator who transforms a customer’s electronic payment into merchant account.

Similar, but with a distinctive function, the payment gateway exists on a merchant’s website and is essentially the point-of-sale, or POS, terminal for a merchant’s website. The payment gateway allows a merchant to take a customer’s credit/debit payment for goods or services purchased online. This may sound similar to the payment processor located physically within a merchant’s store, but the payment gateway is different.

The payment gateway is not merely the online version of a payment processor but rather, in the realm of e-commerce, falls between the payment processor and the merchant’s id, to ensure that the translation from a customer’s electronic credit/debit payment into the merchant’s account is secure. The payment gateway exists because it is often prohibited to directly send information from the payment processor through to the merchant online. The payment gateway acts as a third party to monitor the translation of payment and information.

For merchants seeking to expand their business in both areas of traditional and e-commerce this distinction between payment processors and payment gateways is key to understanding the financial transactions. For merchants only dealing with the sale of goods and services physically, a payment processor in the form of a credit card reader is sufficient. However, as e-commerce continues to grow and customers are increasingly seeking to pay for goods and services through the medium of credit and debit cards, or other digital forms of currency, it is important to consider adding a payment gateway to one’s business to capitalize on the e-commerce market.

Ultimately, when considering payment processors and payment gateways, we can understand payment processors as the middle man between customer and merchant who translates electronic payment information into profits of the merchant–of course for a fee. We can understand the payment gateway to serve as the function of a third party that operates in the background, one who monitors the translation of electronic payment information, making sure it is safe, legal, and legitimate as it occurs on a digital platform. Understanding the functions and roles of payment processors and payment gateways is a key part of achieving financial literacy and business success.